HR Over Coffee

Welcome to HR Over Coffee, a blog and video series from the experts at HR360, where you will learn how to effectively hire, manage and terminate employees.

In today’s business environment, it may be tempting to see the departure of an employee as an opportunity to save money. But this view can prove shortsighted. When you examine the actual costs of employee turnover, it becomes clear that a high turnover rate can do serious harm to a company’s bottom line—damage that can outweigh any short-term savings.

According to the Bureau of Labor Statistics, the median employee tenure of U.S. workers is 4.6 years. However, when it comes to younger workers, in the age group 25 to 34, that number drops to just 3 years. Of course, there are many reasons workers leave their jobs, but the story these numbers tell is that the U.S. workforce is on the move.

As an employer, you incur a set of hard and soft costs every time a position turns over. For purposes of this calculation, we are discussing costs related to a position becoming vacant that must be filled, as opposed to a job that has been eliminated The hard costs of employee turnover include things such as administrative processing of an employee’s departure; advertising and recruiting to find a replacement; interviewing, including reference checks and any testing of candidates to replace the departing employee; and orientation and training of new hires.

The soft costs of employee turnover are sometimes harder to see, but they are real nonetheless. These include lower productivity of the departing employee; lower productivity of the supervisor and remaining team members who must cover that individual’s workload until a replacement is hired; and time spent interviewing and training the new hire. There may also be loss of motivation and therefore productivity when turnover rates are so high that company or departmental morale becomes damaged.

So how do you add it up? A rough guideline is one quarter the total cost of a position’s salary and benefits:

Salary x .30 (benefits) = Salary and Benefits

Salary and Benefits x .25 = Turnover cost

For example, if an employee earns $50,000 in salary, imagine that the total cost of salary and benefits would be around $65,000. The turnover cost to replace that employee could be more than $16,000. If you have several such positions turning over in a given year, your turnover expenditures can quickly run into the tens of thousands of dollars.

Given those numbers, you may find that it’s more efficient to work toward retaining and motivating employees. Of course, raises and promotions are powerful drivers for retention, as are bonuses and incentives—and in the end, it may cost less to invest in your employees than to replace them. This also includes things such as opportunities for training and further education. However, retention and employee motivation efforts need not cost much, if anything. You can also grow loyalty, and reduce turnover, with things such as flexible work arrangements, the freedom to work independently or seek out more satisfying projects or job roles, and formal recognition programs. These efforts demonstrate your commitment to your employees and show that you value their personal and professional growth.

Of course, over time, even the best companies will see employees come and go. The goal is to keep turnover rates at a level that allows you to maintain both productivity and morale. You don’t want to habitually lose good employees, or incur the costs of filling those jobs time and again. For more information on turnover, employee retention, and motivation, visit us online at HR360.com.